Importance of Residential status Residential status of a person is one of the major criteria
which gives the Country the right to levy tax on the income/wealth of that person
a) Residence Jurisdiction b) Source Jurisdiction
Determines the incidence tax on income/wealth of a person
Person is either an individual or a legal entity other than individual (Company)
Countries use objective test or subjective tests or a combination of both for determining person‟s residence in their domestic law.
G.Anantha & Co., 4
Importance of Residential status …
Objective Tests methods : Individuals
Minimum fixed period of time of physical presence in a country
Visa and Immigration status
Citizenship
Nationality
Subjective Test – Individuals
Based on fiscal presence ie; economic/business connection in the country
“Facts and circumstances” test
Unable to apply the physical presence test effectively
3
G.Anantha & Co., 5
Importance of Residential status …
Objective Test – Companies
Place of Incorporation – For eg: Company incorporated in
India is resident in India as per Income Tax Act)
Place of registered office – “ legal seat”
Subjective Test – Companies
Place of management ( For eg: Germany, Portugal,
Switzerland)
Place of head office of company ( For eg: Japan, Slovenia)
Place of main activiy of company (For eg: Israel)
Place of effective management ( For eg: France, Norway)
G.Anantha & Co., 6
Role of Tax Treaties
Elimination of double taxation
a) Juridical Double Taxation
b) Economic Double Taxation
Resolves
a) Source - Residence conflict
b) Residence – Residence conflict
c) Source – Residence conflict
Once residence is determined under the treaty, residence under the domestic tax law becomes irrelevant. [CIT vs.P.V.A.L. Kulandacan Chettiar [2004] 267 ITR 654. (SC)]
4
G.Anantha & Co., 7
Domestic Law - Residential
Status For Individual and a
Hindu undivided family
All other assessees (a firm,an
association of persons,a joint
stock company& every other
person)
• Resident and ordinarily
resident in India
• Resident but not
• ordinarily resident in
• India;or
• Non-resident in India.
• Resident in India; or
• Non-resident in India.
G.Anantha & Co., 8
Domestic Tax Law ….Residential Status
and Tax Liability: Resident & Ordinarily Resident
– World wide Income Taxable.
Resident But Not Ordinarily Resident
– Income accruing or arising in India OR
– Received OR
– Deemed to be received in India OR
– Arising out of business controlled from India
Non Resident
– Only Income accruing OR
– Arise in India OR
– Received OR
– Deemed to be received in India.
5
G.Anantha & Co., 9
Basic conditions to test as to when an
individual is resident
Basic condition (a)
He is in India in the
previous year for a period of
182 days or more
Basic condition (b)
He is in India for a period of
60 days or more during the
previous year and 365 days or
more during 4 years
immediately preceding the
previous year
G.Anantha & Co., 10
Additional Conditions to test as to when a
resident individual is ordinarily resident
in India
Additional
Condition 1
He has been resident in India in
atleast 2 out of 10 previous years
immediately preceding the relevant
previous year
Additional
Condition 2
He has been in India for a period of
730 days or more during 7 years
immediately preceding the relevant
previous year
6
G.Anantha & Co., 11
Resident and
ordinarily
resident
Resident and not
ordinarily
resident
Non Resident
Satisfies one
of the basic
conditions
Satisfies both
of the
additional
conditions
Satisfies one of
the basic
conditions
Satisfies at least
one/none of the
additional
conditions
Satisfies none of the
basic conditions
Residential status of an individual [sec 6
(1),sec 6(6)(a)]
G.Anantha & Co., 12
Residential status of firm and association
of person [sec 6 (2)]
Place of Control Residential Status Of
Family
Wholly in India
Wholly Out of India
Partly in India and partly
outside India
Resident
Non-Resident
Resident
7
G.Anantha & Co., 13
Residential status of a Company [sec 6 (3)]
Place of control An Indian
Company
A Company other
than an Indian
Company
Wholly in India Resident Resident
Wholly out of India Resident Non- Resident
Partly in India &
Partly outside India
Resident Non - Resident
G.Anantha & Co., 14
Treaty Law - Article – 4
Principles for determination of a person‟s residential status as
per the Tax Treaties between countries (contracting states)
Resolves the cases of double taxation due to residence –
residence conflict between the countries.(contracting states)
Allocates the residence based taxing rights to one of the
countries (contracting states)
8
G.Anantha & Co., 15
Treaty Law - Structure of Article 4
Article 4(1) – Definition of a “Resident of a contracting
state”
Article 4(2) – Tie – breaker rule for individuals
Article 4(3) – Tie-breaker rule for persons other than
individuals
G.Anantha & Co., 16
Treaty Law - Article 4(1)
“Resident of a Contacting state” means:
any person who, under the laws of the State, is liable to taxtherein by reason of his domicile, residence, place of management or any other criterion of a similar nature and also includes that State, and any political subdivision or local authority thereof.
This does not include any person who is liable to tax in that State in respect of only of income from sources in that State or capital situated therein.
9
G.Anantha & Co., 17
Article 4(1)…
Any person: Article 3
“Person” for the purpose of a DTA is generally
defined to include “an individual”, “a company”
and any other “body of persons”.
If a country specifically does not recognize an
entity as a “person” in its domestic tax laws, it may
wish to specifically exclude that entity from the
application of the DTA to that entity.
G.Anantha & Co., 18
Article 4(1)…
Liable to Tax
This means the person who is a resident as per the domestic laws of the country should be liable to tax in that country.
„Liable to Tax‟ is not the same as „pays tax‟
(Azadi Bachao Andolan [2003] 263 ITR 706 (SC)
“Liability to Tax is a legal situation and „payment of tax‟is a fiscal fact
Various case laws and AAR rulings with different interpretation of “Liable to Tax” provision.
Asst.DIT v Green Emirates Shipping & Travels [2006] 286
ITR (AT) 60 (Mum.)
G.Anantha & Co., 20
Article 4(1)… domicile, residence, place of management or any other
criterion of a similar nature
domicile ,residence– is a person‟s legal place of residence.
It could be his place or origin or nationality or citizenship. Residence implies some degree of permanence.
place of management – is where the control is located and key decisions as a whole are taken. – (for persons other than individuals)
any other criterion of a similar nature.
11
G.Anantha & Co., 21
Article 4(1) …
Exclusion:
The term does not include any person who is
liable to tax in that State in respect only of
income from sources in that State or capital
situated therein.
G.Anantha & Co., 22
Particulars Mr. A Mr. B
Residential Status as per
domestic tax laws
a) India Resident &
Ordinary resident
Resident but not
ordinary resident
b) United States Resident Resident
Taxability
a) India World wide
income
Income from
sources in India
b) United States World wide
income
World wide income
Article 4(1) …
12
G.Anantha & Co., 23
Dual Resident – Tie Breaker rules
If based on the above definition of a “Resident of a Contracting State” as per the provisions of Article 4(1) of Treaty, a taxpayer becomes resident of more than one country, the tax payer is known as “dual resident”.
In such circumstances, Treaty provides resident “Tie-breaker” rules to ensure that the person is a resident of only one of the contracting states (countries) that claim his resident status, and thereby assign the resident based taxing rights to that country
G.Anantha & Co., 24
Article 4(2) Tie – breaker rule for
Individuals
Availability of a Permanent home
Centres of vital interests (closeness of personal and economic relations with a State)
Habitual Abode
Nationality
Mutual Agreement Procedure
Should exist of the period for which taxation is an issue.
13
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Article 4(2) -Tie breaker rule – Permanent
Home
Should be continuously available
Should be permanent as opposed to short duration
To be determined on a case to case basis based on the facts of
the case
The onus to prove the existence of permanent home to the
assessing officer is on the assessee
G.Anantha & Co., 26
Article 4(2) -Tie-breaker rule – Centre of
Vital interests
To be applied when Permanent home is available for the tax payer in both the States
Presence of family or other domestic ties
Existence of business or investments
Personal conduct of an individual is important
The onus to prove the existence of centre of vital interest to the assessing officer is on the assessee
14
G.Anantha & Co., 27
Article 4(2) -Tie-breaker rule – Habitual
Abode
Applicable when a Permanent home is available, but
the Centre of vital interests cannot be determined;
OR
When no Permanent home is available.
“Habitual” implies repeatedly and persistently and
“An abode” is a place of residence
G.Anantha & Co., 28
Article 4(2) -Tie-breaker rule – Nationality
If the individual has an habitual abode in both the states or in neither of them, then;
The state of which the individual is a national is considered as the resident state
All citizens are nationals of a particular country but all nationals may not necessarily be citizens of the country
15
G.Anantha & Co., 29
Article 4(2) -Tie-breaker rule – Mutual
Agreement Procedure
Last resort when all other tests fail
To seek expert opinion of the Competent authorities of the
Contracting states
Settle issue of by mutual agreement between the countries
Assign the residence based taxing rights to one of the
Contracting states
G.Anantha & Co., 30
Article 4(3) Tie – breaker rule for persons other than
individuals
If a person other than an individual can be considered as resident of both the contracting states, the tie – breaker rule provides that the „place of effective management” will be considered as the resident state. - Article 4 (3).
Place of effective management (POEM) is the place where:
Key management and commercial decisions that are
necessary for entity‟s business are taken in substance.
The most senior person or the group of persons make its decisions
Factually and effectively, the day to day affairs of
the Company is carried on (AAR P.No.9 of 1195{1996} 220 ITR 377 Affirmed in DLJMB Mauritius Investment Company {1997}228 ITR 268
16
G.Anantha & Co., 31
Article 4(3) Tie – breaker rule for persons
other than individuals …
Possible to have more than one place of management
but can have only one place of effective management
“Effective management” means the actual conduct of
business, where the brain of the business is located.
This is to be determined based on the facts on a case
to case basis.
G.Anantha & Co., 32
Case Study – 1
Li Ping was born in Hong Kong. He is 42 years old and
has lived in Vancouver ( Canada) since he was 6 years old.
His employer sent him to Dublin ( Ireland) to work in its
Irish branch for 2 years. Li Ping moved to Dublin together
with his family. However, he maintained his house in
Vancouver and returned to Vancouver many times during
the 2 years. He stayed in his Vancouver house on those
visits. Under Canadian Law, Li Ping is tax resident of
Canada if he resides in Canada or is ordinarily resident in
Canada.
17
G.Anantha & Co., 33
Under Irish Law, Li Ping is a tax resident if he is in Ireland for more than 183 days in a tax year, or more than 280 days in 2 tax years.
The concept of residence is not applicable to Hong Kong tax law. Only Hong Kong sources income is subject to Hong Kong tax.
Article 4(2) of the Canada-Ireland DTA (2003) states that the following residence tie-breaker tests are to be applied sequentially:
• the place at which a permanent home is available
• the place at which the person‟s personal and economic ties are closer
• the place in which the person has an habitual abode; and
• citizenship
There is no DTA between Canada and Hong Kong or Ireland and Hong Kong.
Where is Li Ping resident for tax purposes during his 2 year period
Dublin, if, at the end of it, he :
(a) returns to Vancouver ? (b) moves to South Africa?
Case Study – 1
G.Anantha & Co., 34
Case study – 1…
Opinion:
During the 2 years period: In the case of Canada: He has maintained a permanent house in Vancouver, Canada hence he is tax resident of Canada.
In the case of Ireland, - As per Irish Law, Li Ping is a tax resident since he was in
Dublin for more than 183 days, he is a resident of Ireland.
Hence applying the tie breaker test as per Article 4(2) of the Canada – Ireland
DTA (2003)
Li Ping is a resident of Canada since a perrmanent home is available for him in
Canada.
If he moves to South Africa, even then he is a resident of Canada since the
condition is availability of permanent home and not the actual utilization of
permanent home.
18
G.Anantha & Co., 35
Case Study – 2
Thornco Limited (Thorco) is a company that provides consultancy
services worldwide. It has offices in a number of countries. Thornco
was originally incorporated in State C, where all the records required
by corporate law(eg: the register of sharholders and the minutes of
board of directors and shareholders meetings) are maintained.
However its two main offices are in States A and B
Thornco‟ share holders are its senior consultants. Each of them works
in one of the offices where he supervises a number of employees who
provide consultancy services to local clients. Approximately 30% of
the shareholders work and live in State A and 40% in State B.
G.Anantha & Co., 36
Case Study – 2 …
Management decisions that apply to the whole company like changes to the legal structure, to set up an office in a new country, determining the salary and dividends of each employee- shareholder etc are taken by management committee on which the shareholders serve for periods of 5 years. A shareholder is elected for a period of 5 years to serve as the chief executive.. The current chief executive works and resides in State A. Meetings of committee through video conference calls (which usually originate from the office of the chief executive)
The domestic law of State C provides that a company is a resident of State C if it was incorporated there.
In the domestic law of State A, the relevant criteria for determining the residence of a company are factors that indicate an economic link with the country, such as the place of management, the place where the board meetings take place or where the accounting records are kept
State B‟s domestic law provides that a company is resident where its registered office or principal establishment is located
19
G.Anantha & Co., 37
Case Study – 2 …
There is a complete network of DTAs between States A,B and C, which are identical to the OECD model DTA.
Where is Thornco resident for the purpose of those DTAs ?
Opinion:
Facts:
1. Incorporated in State C – satisfies test of residence – Resident of C
2. In State B neither the registered office of the Company is situated nor the principal establishment is located. .
5. In State A, there is economic link, ie; place of management since the Chief executive works and resides in State A – so as per domestic law – the Company is resident of State A. The management committee takes decisions which apply to the Company as a whole. The meetings of the management committee usually originate from the office of the chief executive who is residing and working from State A.
Hence the place of effective management criteria is satisfied for State A.
G.Anantha & Co., 38
Case Study – 2 …
Analysis
Tie- Breaker rules - test
Since the Company is resident as per the domestic law of State C and State A, the place of effective management has to be considered as the state of residence for assigning taxing rights. In this case the place of effective management is State A since:
1. Chief executive is working and residing in State A
2. 30% of share holders live and work in State A
3. Meeting of management committee is usually originated from State A since the chief executive resides and works from State A
4. Management committee takes decisions for the company as a whole
Conclusion:
For the purpose of DTA Thornco is resident of State A.
